This is a blog that I started in october 2010, mainly for discussing my ideas on the economy, taxation and politics. Please add comments - I'll do my best to reply. If you are new, I would recommend watching one of my YouTube presentations (in French or English). You can download a fully indexed pdf version (over 600 pages) here.

12 Jun 2012

Over the past couple of months, I have become convinced that we should all be striving to reform the monetary system. Money creation by commercial banks should be banned. There is no reason why governments should pay interest to commercial banks for borrowing money that the banks simply create out of thin air. Instead, governments should be doing the money creation themselves with no interest attached via regulated central banks.

I believe that it would be difficult for any rational person to read these books and come away still believing that the current system can be justified. The idea that governments should borrow money from commercial banks who create the money out of thin air and then charge us interest is simply absurd. It has to be more sensible for governments to create the money needed to allow the economy to function themselves, free of interest. It's been done many times in the past - by the Romans, by the American colonists before the revolution, by Abraham Lincoln, and by the Island of Guernsay to name but a few. And it can clearly work very well.

So, what possible arguments could be raised to defend the current system? The main argument that we hear is that money creation cannot be left in the hands of politicians - they would just print unreasonable amounts to buy votes, and the result would be runaway inflation. Of course, we are supposed to believe that money creation is done much more reasonably when it is left in the hands of commercial bankers. I would just love to hear the bankers trying to convince us that their way of creating money is better.

I certainly agree that there have to be strict controls over the creation of money, even when it is done by public authorities such as central banks. So what sort of controls could we have?

Well, firstly, I think that it would help a lot if any money creation would need the full approval of the people, via their elected representatives, or even via a referendum. Thus, if the overwhelming majority of the public think that creating fresh money to build new hospitals and schools is a good idea, then so be it. The government would be authorized to generated the precise amount of money needed for the project to go ahead, and of course there should be very strict control over the use of the funds to make sure that the money is used appropriately and without waste. This is clearly a very important point.

Similar mechanisms could be used to fund any work that was in the public interest, and which was approved by the population as a whole. Thus, I am certain that paying for police and fire services, and other important public activities such as libraries would receive massive support. And one could add to this list by providing direct public funding for sports facilities, theatre, music and the arts.

This list of activities that would receive approval of the vast majority of citizens could end up getting rather long. And in the end, if direct money creation by the government was used for this, the amount of money being created could start getting excessive, with the result that there would be a risk of running into inflation - the main problem raised by those who argue that governments should not be allowed to create money directly.

Actually, I think that this point might not be reached for quite a long time. In most countries, a substantial proportion of the population is unemployed - the figures have reached 25% in Spain, for example. And these people are often being propped up by receiving government funds such as unemployment benefit for effectively doing nothing. Wouldn't it be much better for those people to be paid to do something productive by giving them jobs directly financed by public funds? They could be doing useful things like caring for the elderly and infirm, looking after preschool children to allow parents to go out to work, repairing the public infrastructure, building roads and other transport systems, insulating houses etc. etc. The list of useful things that could be done in the public interest is very long.

As long as the money used for paying for this sort of work is increasing the overall wealth of the population, this sort of productive activity is unlikely to create inflation.

But, let's suppose that by monitoring prices, we find that the economy is overheating and that there is too much money creation going on. What do we do then? Well, it's simple. The government would need to have a mechanism in place that automatically takes money out of the system if there is too much. And how can it do that? By taxation. Indeed, it can be argued that the main function of taxation is to ensure that the supply of money in the economy is kept under control.

Note that seen from this perspective, taxation is not being used to pay for public services at all. We don't need to balance the government's books by ensuring that tax revenue matches government expenditure. It's actually fine for governments to create their own money to pay for public services, as long as the money supply is only increasing enough to allow the economy to function optimally.

Now, what sort of tax would provide a simple way of keeping the rate of money creation in the economy under control? Well, those of you who have been following my proposals will know that I think that a flat rate financial transaction tax (FTT) would be a particularly good method. Indeed, I have argued that one of its advantages is that the rate of the tax can be continuously varied so that the amount of revenue can be maintained at the desired level. Those changes can be made every day, or even every hour if needed. It's simply a question of changing the number in the computers that handle electronic transactions - exactly as the dollar-euro exchange rate is varied continuously.

So, let's just change the phrasing a bit. Instead of saying that the FTT rate is adjusted continuously so that government tax revenue matches government expenditure (the so-called Golden Rule), the new version will say that the FTT rate is adjusted continuously so that the total money supply in the economy is set at the optimal value. If an independent Monetary Policy Committee (or the equivalent) considers that the money supply should increase by 2% in the next year, the government would be able to spend as much newly created interest free money as is needed to cover all the projects that are approved by the great majority of the population, and then the FTT would be continuously varied to ensure that overall, the money supply increases by exactly the 2% proposed by the monetary committee.

In this way, the whole system is balanced. Money creation can only be used for projects that are worth doing and in the public interest - unlike the current system where money creation is entirely decided by what maximises profits for banks. And the amount of money in the economy cannot increase beyond the level set by an independent Monetary Policy Committee who would be totally separate from the politicians. There would be no possibility of excessive inflation, and the whole system would be very simple to run. Indeed, you might not even need a Monetary Policy Committee. It might be enough to implement an algorithm that automatically changed the FTT rate to ensure that the money supply was fixed at the optimal level. There would no doubt be serious debates about what that optimal level should be - but once decided, it would be simple to use the FTT mechanism to keep the money supply at the desired level.

What do you all think? Could this be the solution for an optimally designed social system? Comments please!